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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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Commission File Number: 001-38410

BioXcel Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

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(475) 238-6837

(Registrant’s telephone number, including area code)

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N/A

(Former name, former address and former fiscal year, if changed since last report)

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ⌧

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ◻ No ⌧

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The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at August 11, 2020 was 22,354,882.

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

These forward-looking statements are based on management’s current expectations. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors,” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not rely on these forward-looking statements as predictions of future events. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.

As used in this Quarterly Report on Form 10-Q, unless otherwise specified or the context otherwise requires, the terms “we,” “our,” “us,” the “Company” or “BTI” refer to BioXcel Therapeutics, Inc. and its subsidiaries, and “BioXcel” or “Parent” refer to the Company’s parent company, BioXcel LLC and its predecessor, BioXcel Corporation. All brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

We may use our website as a distribution channel of material information about the Company. Financial and other important information regarding the Company is routinely posted on and accessible through the Investors sections of its website at www.bioxceltherapeutics.com. In addition, you may automatically receive email alerts and other information about the Company when you enroll your email address by visiting the “Email Alerts” option under the News / Events menu of the Investors section of ours website at www.bioxceltherapeutics.com.

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

BIOXCEL THERAPEUTICS, INC.

BALANCE SHEETS

(amounts in thousands, except share and per share data)

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The accompanying notes are an integral part of these financial statements.

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BIOXCEL THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

(unaudited)

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The accompanying notes are an integral part of these financial statements.

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BIOXCEL THERAPEUTICS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands, except shares)

(unaudited)

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The accompanying notes are an integral part of these financial statements.

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BIOXCEL THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

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The accompanying notes are an integral part of these financial statements.

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BIOXCEL THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

(amounts in thousands, except share and per share data)

(unaudited)

Note 1. Organization and Principal Activities

BioXcel Therapeutics, Inc. is a clinical stage biopharmaceutical company utilizing artificial intelligence to identify improved therapies in neuroscience and immuno-oncology. BTI's drug re-innovation approach leverages existing approved drugs and/or clinically validated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indices. BTI's two most advanced clinical development programs are BXCL501, a sublingual thin film formulation designed for acute treatment of agitation resulting from neuropsychiatric disorders, and BXCL701, an orally administered systemic innate immunity activator designed for treatment of a rare form of prostate cancer, pancreatic cancer and advanced solid cancers in combination with other immuno-oncology agents. The Company’s primary activities have been clinical and pre-clinical research and development for BXCL501 and BXCL701.

As used in these financial statements, unless otherwise specified or the context otherwise requires, the terms the “Company” or “BTI” refer to BioXcel Therapeutics, Inc., and “BioXcel” or “Parent” refer to BioXcel LLC and, its predecessor, BioXcel Corporation.

The Company is a minority-owned subsidiary of BioXcel and was incorporated under the laws of the State of Delaware on March 29, 2017. The Company’s principal office is in New Haven, Connecticut.

The unaudited financial information for the three and six months ended June 30, 2020 and 2019 is presented on the same basis as the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The Company does not have any components of other comprehensive income (loss) recorded within its financial statements, and, therefore, does not separately present a statement of comprehensive income (loss) in its financial statements.

Certain reclassifications have been made to the prior year financial information to conform to the current period presentation. These reclassifications had no effect on the reported results of operations.

Note 2. Basis of Presentation

The Company’s financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”). The Company believes that its existing cash and cash equivalents will be sufficient to cover its cash flow requirements for at least the next twelve months from the issuance date of these financial statements.

Note 3. Summary of Significant Accounting Policies

Use of Estimates

The Company’s financial statements are prepared in accordance with GAAP. The preparation of financial statements requires the Company to make estimates and assumptions that impact the reported amounts of assets, liabilities and expenses in its financial statements and the accompanying notes. The most significant estimates in the financial statements relate to the fair value of equity awards and valuation allowance related to the Company’s deferred tax assets and liabilities.

The preparation of our financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity and expenses. We base our estimates on historical experience and

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on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of expenses.

During the six months ended June 30, 2020, the novel coronavirus disease, or COVID-19, was declared a pandemic and spread across the globe, including the United States and Europe. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including expenses, reserves and allowances, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19, as well as the economic impact on local, regional, national and international customers and markets.

We have evaluated the impact of COVID-19 within our financial statements and given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 outbreak on our results of operations, financial condition, or liquidity. The financial statements do not reflect any adjustments as a result of the pandemic but there may be changes to the current estimates in future periods.

Unaudited Interim Financial Information

The accompanying unaudited financial statements do not include all of the information and footnotes required by GAAP. The accompanying year-end balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2020, the results of its operations for the three and six months ended June 30, 2020 and 2019 and its cash flows for the three and six months ended June 30, 2020 and 2019, respectively. The results for the six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, any other interim periods or any future year or period.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of June 30, 2020, cash equivalents were comprised of money market funds. Cash and cash equivalents held at financial institutions may at times exceed federally insured amounts. We believe we mitigate such risk by investing in or through major financial institutions.

Offering Costs

The Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until the equity financing was consummated. After consummation of an equity financing, these costs were recorded in stockholders’ equity as a reduction of proceeds generated as a result of the offering.

Effective September 22, 2019, the Company terminated its At-The-Market (“ATM”) program. All costs associated with this program have been amortized and charged to Additional paid-in-capital.

Property and Equipment

Equipment consists of computers and related equipment that are stated at cost and depreciated using the straight-line method over estimated useful life of 5 years. Furniture is being depreciated using the straight-line method over approximately 7 years. Leasehold improvements are being amortized over the shorter of the life of the lease or the asset.

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The Company follows the guidance provided by the Financial Accounting Standards Board (“FASB”) ASC Topic 360-10, Property, Plant, and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated. Impairment charges are recognized at the amount by which the carrying amount of an asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell.

Since its inception, the Company has not recognized any impairment or disposition of long lived assets.

Leases

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our balance sheet.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our lease did not provide an implicit rate, we used an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Renewal options were not included in our calculation of the related asset and liability. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company adopted ASU 2016-02 Lease Accounting Topic 842 in January 2019 and recorded a ROU asset and related liability in the amount of $1,308 on commencement of a new office lease.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation—Stock Compensation,” which requires the measurement and recognition of compensation expense based on estimated fair market values for all share-based awards made to employees and directors, including stock options. The Company’s 2017 Equity Incentive Plan (the “2017 Stock Plan”) was adopted and became effective in August 2017. The Company’s 2020 Incentive Award Plan (the “2020 Stock Plan”) became effective in May 2020. Following the effective date of the Company’s 2020 Incentive Award Plan, the Company ceased granting awards under the 2017 Equity Incentive Plan; however the terms and conditions of the 2017 Equity Incentive Plan continue to govern any outstanding awards granted thereunder.

Both BioXcel and the Company’s stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The estimated fair value of stock option awards was determined using the Black-Scholes option pricing model on the date of grant. Significant judgment and estimates were used to estimate the fair value of these awards, as they were not publicly traded. Stock awards granted by the Company subsequent to the IPO are valued using market prices at the date of grant.

ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The Black-Scholes option-pricing model was used as its method of determining fair value. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the award is recognized as an expense in the statement of operations over the requisite service period. The periodic expense is then determined based on the valuation of the options. The Company has elected to account for forfeitures as they occur, by reversing compensation cost when the award is forfeited.

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The Company adopted FASB ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting as of January 1, 2019 which allows non-employee options to be expensed using the adoption date fair value.

Research and Development Costs

Research and development expenses include wages, benefits, facilities, supplies, external services, clinical study and manufacturing costs and other expenses that are directly related to the Company’s research and development activities. At the end of the reporting period, the Company compares payments made to third party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs. The Company expenses research and development costs as incurred.

Expenses Accrued Under Contractual Arrangements with Clinical Research Organizations

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing expenses, we estimate the time period over which services will be performed and the level of effort to be expended in each period, which is based on an established protocol specific to each clinical trial. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period.

Patent Costs

Costs related to filing and pursuing patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures is uncertain.

Fair Value Measurements

ASC 820 “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC 820 are described below:

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In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, as well as considering counterparty credit risk in its assessment of fair value.

The carrying amounts of cash equivalents, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments.

Net Loss per Share

The Company computes basic net loss per share by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period and excludes the effects of any potentially dilutive securities. Diluted earnings per share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods as applicable. The potential dilutive securities included outstanding options (for both employees and non-employees) for the three months ended March 31, 2020 and 2019. Such securities have not been included in the loss per share calculation since their impact would be anti-dilutive. There were 3,223,450 and 3,143,233 shares of options that were excluded from the calculation of the loss per share for the three and six months ended June 30, 2020, respectively.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) which amends the existing guidance relating to the accounting for income taxes. This ASU is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of accounting for income taxes and to improve the consistent application of GAAP for other areas of accounting for income taxes by clarifying and amending existing guidance. The ASU is effective for fiscal years beginning after December 15, 2020. The Company does not expect that the adoption of this new guidance will have a material impact on the Company’s Financial Statements.

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Note 4. Transactions with BioXcel

The Company has entered into the Amended and Restated Asset Contribution Agreement, pursuant to which BioXcel agreed to contribute BioXcel’s rights, title and interest in BXCL501, BXCL701, BXCL502 and BXCL702, and all of the assets and liabilities associated in consideration for (i) 9,480,000 shares of our common stock, (ii) $1,000 upon completion of an initial public offering, (iii) $500 upon the later of the 12 month anniversary of an initial public offering and the first dosing of a patient in the bridging bioavailability/ bioequivalence study for the BXCL501 program, (iv) $500 upon the later of the 12 month anniversary of an initial public offering and the first dosing of a patient in the Phase 2 proof of concept open label monotherapy or combination trial with Keytruda for the BXCL701 program and (v) a one-time payment of $5,000 within 60 days after the achievement of $50,000 in cumulative net sales of any product or combination of products resulting from the development and commercialization of any one of the Candidates or a product derived therefrom. With the completion of the Company’s IPO in March 2018, $1,000 was charged to Research and Development costs in connection with (ii) above and was paid on April 5, 2018. The Company paid $500 to BioXcel in connection with (iii) above in April 2019. In July 2019, the Company completed the first dosing of a patient in the

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combination trial of BXCL701 with Keytruda, and as a result the Company paid $500 to BioXcel in connection with (iv) above in July 2019.

The Company entered into a Separation and Shared Services Agreement with BioXcel that took effect on June 30, 2017, as amended and restated on November 7, 2017 and March 6, 2020, or the Services Agreement, pursuant to which BioXcel will allow us to continue to use the office space, equipment, services and leased employees based on the agreed upon terms and conditions for a payment of defined monthly and/or hourly fees. The office space and equipment portion of the Services Agreement ended effectively on April 30, 2018 when the Company moved to new office space to accommodate additional personnel that had been hired. Services provided by BioXcel through its subsidiaries in India and the United States will continue indefinitely, as agreed upon by the parties. These services are primarily for drug discovery and for chemical, manufacturing and controls cost. Service charges recorded under this agreement were $259 and $223 for the three months ended June 30, 2020 and 2019, respectively. Service charges recorded under this agreement were $656 and $516 for the six months ended June 30, 2020 and 2019, respectively.

Under the Services Agreement, the Company has an option, exercisable until December 31, 2020, to enter into a collaborative services agreement with BioXcel pursuant to which BioXcel shall perform product identification and related services for us utilizing EvolverAI. The parties are obligated to negotiate the collaborative services agreement in good faith and to incorporate reasonable market-based terms, including consideration for BioXcel reflecting a low, single-digit royalty on net sales and reasonable development and commercialization milestone payments, provided that (i) development milestones shall not exceed $10 million in the aggregate and not be payable prior to proof of concept in humans and (ii) commercialization milestones shall be based on reaching annual net sales levels, be limited to 3% of the applicable net sales level, and not exceed $30 million in the aggregate. BioXcel shall continue to make such product identification and related services available to us for at least five years from June 30, 2017. The parties are currently discussing extending the product identification and related services that BioXcel would provide under the collaborative services agreement, however, as of the date hereof, we have not reached a definitive agreement.

The Company paid $9,024 during the six months ended June 30, 2020 for the purchase and subsequent cancellation of 300,000 shares owned by BioXcel, which is more fully discussed below under Note 8 to these financial statements.

Note 5. Property & Equipment

Property and Equipment, net consisted of the following

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Note 6. Commitments and Contingencies

Master Service Agreements

The Company has entered into a Master Services Agreement (“MSA”) with a Contract Research Organization (“CRO”), dated November 1, 2018 for strategic planning, expert consultation, clinical trial services, statistical programming and analysis, data processing, data management, regulatory, clerical, project management, medical device services, and other research and development services as set forth in specific work orders. This agreement is for a period of five (5) years. 

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Excluding the CRO’s property, all improvements, inventions, processes, techniques, work product, know-how, data and information generated, conceived, reduced to practice or derived under the MSA by the CRO or its personnel and subcontractors, shall be and remain the exclusive property of the Company, and any inventions that may evolve from the foregoing shall belong to the Company.

The Company entered into a series of cancellable work orders to support its clinical trial activities, related to the first of the Company’s BXCL701 clinical trials. This clinical trial is expected to cost approximately $10,000 and is anticipated to take place over the next two years. To date, the Company has incurred $3,004 in costs for the work surrounding this trial.

In the first quarter of 2019 the Company entered into a second series of cancellable work orders to support a second clinical trial related the Company’s BXCL701 product candidate. This clinical trial is expected to aggregate approximate approximately $8,000 and it is anticipated to take place over the next three years. Approximately one half of this cost is to be reimbursed by a partner. The Company has incurred $1,241 of costs in connection with this trial.

In addition, an MSA was signed with a second CRO during the first quarter of 2019 to include strategic planning, expert consultation, regulatory activities, data interpretation, New Drug Application (“NDA”) services, and research and development services, including clinical, data management, statistical and medical writing activities. This MSA supports BXCL501. The cost of these clinical trials were expected to aggregate approximately $16,500, and these trials were ongoing during the first half of 2020. As of June 30, 2020, the Company has incurred $16,296 of costs in connection with these trials.

Contingencies

In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of coronavirus, a global pandemic. This outbreak has caused and is continuing to cause major disruptions to businesses and financial markets worldwide. This may affect the Company’s operations and those of third parties on which the Company relies, including causing disruptions in the supply of the Company’s product candidates and the conduct of current and planned preclinical and clinical studies. The Company may need to limit its operations and may experience limitations in employee resources. There are risks that the COVID-19 pandemic may be more difficult to contain than currently anticipated in which case the risks described herein could increase significantly. The extent to which the COVID-19 pandemic impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

Additionally, while the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the coronavirus on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity, and the Company’s ability to complete its preclinical and clinical studies on a timely basis, or at all. The ultimate impact of COVID-19 is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing, preclinical and clinical trial activities or the global economy as a whole. However, these effects could have a material, adverse impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which the Company relies.

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Note 7. Accrued Expenses and Other Current Liabilities

Accrued expenses consist of the following:

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Other current liabilities as of June 30, 2020 includes $194 for the current portion of Operating lease liabilities and $934 for the financing of insurance premiums.

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Note 8. Stockholders’ Equity

Authorized Capital

The Company is authorized to issue up to 10,000,000 preferred shares with a par value of $0.001 per share. No preferred shares are issued and outstanding.

The Company is authorized to issue up to 50,000,000 shares of common stock with a par value of $0.001 per share. The Company had 20,352,913 and 18,087,382 shares of common stock outstanding as of June 30, 2020 and December 31, 2019, respectively.

Description of Common Stock

Each share of common stock has the right to one vote. The holders of common stock are entitled to dividends when funds are legally available and when declared by the board of directors.

Common Stock Issuances

On May 20, 2019, the Company entered into an Open Market Sale Agreement (the “Sale Agreement”) with Jefferies LLC (“Jefferies”) pursuant to which the Company may offer and sell shares of its common stock, par value $0.001 per share (the “Common Stock”), having an initial offering price no greater than $20.0 million (the “Shares”), from time to time, through an “at the market offering” program under which Jefferies will act as sales agent. The Company sold 66,193 shares under the Sale Agreement for gross proceeds of $737, issuance costs of $350 or net proceeds of $387. The Sale Agreement was terminated by the Company on September 22, 2019

On September 26, 2019, the Company entered into an underwriting agreement with several underwriters in connection with the issuance and sale by the Company in a public offering of 2,303,030 shares of the Company’s common stock at a public offering price of $8.25 per share, less underwriting discounts and commissions, pursuant to an effective shelf registration statement on Form S-3 (Registration No. 333-230674) and a related prospectus supplement filed with the SEC (the “September 2019 Offering”). The September 2019 Offering closed on September 30, 2019.

The Company received proceeds of approximately $17,423, net of issuance costs of $1,577 from the September 2019 Offering. The Company intends to use the net proceeds for general corporate purposes, which may include development and commercialization of their product candidates, research and development, general and administrative expenses, license or technology acquisitions, and working capital and capital expenditures.

In February 2020, the Company sold in a registered offering 2,300,000 shares of our common stock at a public offering price of $32.00 per share for gross proceeds of $73,600 less underwriting discounts and commissions. The

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Company received proceeds of approximately $68,811, net of issuance costs of $4,789 from the February 2020 offering. The Company used $9,024 of the proceeds to purchase and cancel 300,000 shares of common stock from BioXcel.

Note 9. Stock-Based Compensation

Stock Options

The Company’s 2017 Stock Plan) became effective in August 2017. Following the effective date of the Company's 2020 Stock Plan (as defined below), the Company ceased granting awards under the 2017 Stock Plan; however the terms and conditions of the 2017 Stock Plan continue to govern any outstanding awards granted thereunder.

The Company’s 2020 Incentive Award Plan (the “2020 Stock Plan”) was approved and became effective at the Company’s 2020 annual meeting of Shareholders on May 20, 2020. The 2020 Stock Plan authorizes for issuance the sum of (i) 911,000 shares of the Company’s common stock authorized for issuance and 231,941 shares of the Company’s common stock which represents the number of shares that remained available for issuance under the 2017 Stock Plan immediately prior to the approval of the 2020 Stock Plan by the Company’s shareholders. Any shares of Common Stock which, as of immediately prior to the approval of the 2020 Stock Plan by the Company’s shareholders, are subject to awards granted under the 2017 Stock Plan that are forfeited or lapse unexercised and are not issued under the 2017 Stock Plan will increase the number of shares of common stock available for grant under the 2020 Stock Plan. In addition, the number of shares available for issuance under the 2020 Stock Plan will increase on the first day of each calendar year beginning January 1, 2021 and ending on and including January 1, 2030 by a number of shares equal to the lesser of (A) 4% of the aggregate number of shares of the Company’s common stock outstanding of the immediately preceding calendar year and (B) such smaller number of shares of common stock as is determined by the Board of Directors.

The Company’s 2020 Employee Stock Purchase Plan (“ESPP”) was also approved and became effective at the Company’s 2020 annual meeting of Shareholders on May 20, 2020. The ESPP is designed to assist eligible employees of the Company with the opportunity to purchase the Company’s common stock at a discount through accumulated payroll deductions during successive offering periods. The aggregate number of Shares that may be issued pursuant to rights granted under the ESPP is 100,000 shares of common stock. In addition, the number of shares available for issuance under the ESPP will increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030 by a number of shares of common stock equal to the lesser of  (a) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by the Board. The number of shares that may be issued or transferred pursuant to rights granted under the component of the ESPP that is intended to qualify for favorable U.S. federal tax treatment under Section 423 of the Code (the “Section 423 Component”) shall not exceed 500,000 shares. The purchase price will be determined by the administrator of the ESPP and, for purposes of the Section 423 Component, shall not be less than 85% of the fair market value of a share on the first trading day or on the last trading day of the applicable offering period, whichever is lower. To date, no shares have been sold under the ESPP.

As of June 30, 2020, there were 4,020,516 shares of the Company’s common stock authorized for issuance under the 2017 Stock Plan and the 2020 Stock Plan (collectively, the “Stock Compensation Plans”). Options granted under the Stock Compensation Plans have a term of ten years with vesting terms determined by the board of directors, which is generally four years.

The fair value of options granted during the six months ended June 30, 2020 was estimated using the Black-Scholes option-pricing model with the following assumptions.

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​

Prior to the Company’s IPO, it did not have a history of market prices of its common stock and, as such, volatility was estimated using historical volatilities of similar public companies. The expected term of the options granted to employees is estimated based on the simplified method, which calculates the expected term based upon the midpoint of the term of the award and the vesting period. The Company uses the simplified method because it does not have sufficient option exercise data to provide a reasonable basis upon which to estimate the expected term. The expected term of options granted to non-employee service providers represents the contractual term of the option. The expected dividend yield is 0% as the Company has no history of paying dividends nor does management expect to pay dividends over the contractual terms of these options. The risk-free interest rates are based on the United States Treasury yield curve in effect at the time of grant, with maturities approximating the expected term of the stock options.

The following table summarizes information about stock option activity under the Stock Compensation Plans for the six months ended June 30, 2020 (in thousands, except share and per share data):

​

There were 289,373 shares available for grant as of June 30, 2020.

The Company recognized stock-based compensation expense under the Stock Compensation Plans of $2,717 and $1,669 for the six months ended June 30, 2020 and 2019, respectively.

The total grant-date fair value of options was $30,336 for the six months ended June 30, 2020.

Unrecognized compensation expense related to unvested awards as of June 30, 2020 was $30,350 and will be recognized over the remaining vesting periods of the underlying awards. The weighted-average period over which such compensation is expected to be recognized is 1.7 years.

BioXcel Charges

BioXcel has granted stock options to its employees under its own Equity Incentive Plan (“BioXcel Plan”). Stock-based compensation expense from the BioXcel Plan is allocated to the Company over the period over which those stock option awards vest and are based on the percentage of time spent on Company activities compared to BioXcel activities, which is the same basis used for allocation of salary costs. The BioXcel stock option awards are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. The estimated fair value of these BioXcel stock option awards was determined using the Black Scholes option pricing model on the date of grant. Significant judgment and estimates were used to estimate the fair value of these awards, as they are not publicly traded.

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Share based compensation expense (income), net of forfeitures, recognized by the Company in its statements of operations related to BioXcel equity awards totaled approximately $15 and $43 for the six months ended June 30, 2020 and 2019, respectively.

Total share based compensation charges were approximately $2,732 and $1,712 for the six months ended June 30, 2020 and 2019, respectively. The Company charged $1,384 and $1,348 to research and development and general and administrative expense for the six months ended June 30, 2020, respectively. The Company charged $1,009 and $703 to research and development and general and administrative expense for the six months ended June 30, 2019, respectively.

Note 10. Income Taxes

Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

As a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s net deferred tax assets is appropriate. No income tax liabilities existed as of June 30, 2020 and December 31, 2019 due to the Company’s continuing operating losses.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted on March 27, 2020 temporarily modifies the federal income tax rules on net operating losses incurred in 2018, 2019, and 2020. Under the CARES Act, a taxpayer that incurs in 2020 or has incurred during 2019 or 2018 an NOL is permitted to carryback such NOL to the prior five years to offset prior year income to claim a tax refund of previously paid federal income taxes.  As a result of the Company’s losses since inception it would not benefit from this provision.   The Act retroactively suspends the 80% income limitation on use of NOL carryovers for taxable years beginning before January 1, 2021, and allows 100% of any such taxable income to be offset by the amount of such NOL carryforward.  This 80% income limitation is reinstated for tax years beginning after December 31, 2020. 

Note 11. Leases

The Company entered into an agreement to lease approximately 11,040 square feet of space on the 12^th floor of the building located at 555 Long Wharf Drive, New Haven, Connecticut that commenced February 22, 2019, or the Commencement Date. The premises were occupied in March 2019.

The term of the 12^th floor lease continues from the Commencement Date through the last day of the calendar month immediately following the seventh anniversary of the Commencement Date.

The Company’s improvement costs were approximately $642 and are being amortized over the life of the lease.

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Maturities of the operating lease liability are as follows:

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The current portion of the Company’s operating lease liability of $194 as of June 30, 2020 is included in other current liabilities on the balance sheet.

The Company recorded lease expense of $108 and $76 related to its operating lease right-of-use asset for the six months ended June 30, 2020 and 2019, respectively.

The Company has an option to renew the lease for one additional five-year term at 95% of the then-prevailing market rates but not less than the rental rate at the end of the initial lease term.

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Note 12. Borrowing

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The Company received funds under the Paycheck Protection Program of the CARES Act in April 2020 in the amount of $537. The application for these funds requires the Company to, in good faith, certify that the current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. On April 23, 2020, the Small Business Administration issued a new FAQ #31, which provided guidance on what it means to certify that: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Following review of this new FAQ #31 the Company decided to withdraw from the Paycheck Protection Program and has repaid the loan in full together with all accrued interest.

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13. Subsequent Event

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In July 2020, the Company sold in a registered offering 4,000,000 shares of its common stock at a public offering price of $50.00 per share for gross proceeds of $200,000 less underwriting discounts and commissions. The Company received proceeds of approximately $187,500, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Under the terms of the Underwriting Agreement entered into by the Company in connection with the July 2020 offering, certain stockholders of the Company have also granted the underwriters an option exercisable for thirty days to purchase up to an additional 600,000 shares of common stock at the public offering price less underwriting discounts and commissions. The Company will not receive any of the proceeds from any sale of shares in the offering by such stockholders.

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The Company intends to use the net proceeds of the offering to fund ongoing clinical trials, commercialization preparation and for general corporate purposes.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2019. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, such as information with respect to our plans and strategy for our business and expectations related to the clinical development of our product candidates, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.

All dollar amounts in this discussion and analysis are to the nearest thousand unless otherwise noted.

Overview

We are a clinical stage biopharmaceutical company utilizing novel artificial intelligence-based approaches to identify the next wave of medicines across neuroscience and immuno-oncology. Our drug re-innovation approach leverages existing approved drugs and/or clinically validated product candidates together with big data and proprietary machine learning algorithms to identify new therapeutic indices.

We believe that this differentiated approach has the potential to reduce the cost and time of drug development in diseases with substantial unmet medical need. Our two most advanced clinical development programs are BXCL501, a proprietary sublingual thin film formulation of the adrenergic receptor agonist dexmedetomidine, or Dex, for acute treatment of agitation resulting from neuropsychiatric disorders, and BXCL701, an orally available systemic innate-immune activator for treatment of an aggressive form of prostate cancer and pancreatic cancer.

During the first quarter ended March 31, 2020 and continuing through June 30, 2020, the novel coronavirus disease, or COVID-19, was declared a pandemic and spread to multiple regions across the globe, including the United States and Europe. The outbreak and government measures taken in response have also had a significant impact, both direct and indirect, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen.

During the first quarter of 2020 we took steps in line with guidance from the U.S. Centers for Disease Control and Prevention (CDC) and the State of Connecticut to protect the health and safety of our employees and the community. In particular, we implemented a work-from-home policy for all employees and have restricted on-site activities to certain chemical, manufacturing and control (“CMC”) and clinical trial activities. We continue to assess the impact of the COVID-19 pandemic to best mitigate risk and continue the operations of our business. Beginning late in the second quarter of 2020 we began to slowly bring our staff, in very limited numbers back to our office. This return to work is scheduled to be completed in September 2020. We have taken steps to protect our workforce and have instituted strict work rules to protect our employees.

We continue to work closely with our clinical sites to monitor the potential impact of the evolving COVID-19 pandemic. We remain committed to our clinical programs and development plans. Through June 30, 2020, we have not experienced any significant delays to our ongoing or planned clinical trials, except for challenges in accessing elderly care facilities; however, this could rapidly change.

During the second quarter of 2020, we continued to advance the development of our two lead clinical programs, BXCL501 and BXCL701.

On July 7, 2020, we announced that we had received a Notice of Allowance from the U.S. Patent and Trademark Office (“USPTO”) for patent application No. 16/453,679 related to BXCL501, our proprietary sublingual thin-film

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formulation of dexmedetomidine (“Dex”). The patent is expected to cover film formulations containing Dex and methods of treating agitation using such film formulations.

A Notice of Allowance is issued after the USPTO makes a determination that a patent should be granted from an application. The patent, which is expected to be issued in the third quarter of 2020, will have a term that expires no earlier than 2039. After issuance, we plan to list the U.S. patent in the FDA's Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book

As of August 1, 2020, our patent portfolio included 6 Patent Cooperation Treaty applications, 7 U.S. utility applications, 1 allowed U.S. utility application, 16 U.S. provisional applications, 43 non-U.S. applications, and 3 design patent applications, one of which is a U.S. application.

BXCL501 Neuroscience Program

On July 20, 2020, we announced that BXCL501, our proprietary sublingual thin film of dexmedetomidine, met the primary and secondary endpoints of SERENITY I and SERENITY II, demonstrating a robust treatment effect in the trials. Results demonstrated that BXCL501 was well tolerated, with rapid and durable reductions in agitation.

In patients with schizophrenia (SERENITY I) and a second study of bipolar disorder (SERENITY II), highly statistically significant and clinically meaningful reductions in the Positive and Negative Syndrome Scale, Excitatory Component (“PEC”) score at two hours, the primary endpoint, were reported for both high and low dose cohorts of BXCL501 compared to placebo (p<0.0001). Both studies also met the key secondary endpoint, demonstrating improvement in PEC scores beginning as early as 20 minutes in patients with bipolar disorder, at both dose levels, and as early as 20 minutes in patients with schizophrenia for the 180 mcg dose level. Exploratory efficacy endpoints confirmed the primary endpoint, with duration of response lasting at least four hours after treatment. We have a pre-NDA meeting with the FDA this October and plan to submit an NDA with the FDA for indications of bipolar disorder and schizophrenia in the first quarter of 2021.

Summary of Topline Results:

SERENITY I (Patients with Schizophrenia)

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SERENITY II (Patients with Bipolar Disorder*)

*includes bipolar I and II disorder, with a diagnosis of depression, hypomania, mania, mixed episodes or unspecified

The secondary endpoint was highly statistically significant at 30 minutes, 45 minutes, 60 minutes, and 90 minutes in both studies. At 20 minutes, both doses were statistically significant in patients with bipolar disorder (p<0.025), and in patients with schizophrenia who received the higher 180 mcg dose.

Efficacy was further evaluated using two additional measures of agitation—the Agitation and Calmness Evaluation Scale (“ACES”), and Clinical Global Impression – Improvement Scale (“CGI-I”)—each of which showed statistically significant improvements for both doses of BXCL501 compared to placebo.

BXCL501 was well tolerated in both SERENITY trials. Overall, the most commonly reported adverse events from both trials were somnolence (22% for 180 mcg dose arms, 21% for 120 mcg dose arms and 6% for placebo arms; >75% of these events were classified as mild), dry mouth (4.4%, 7.5% and 1.2%, respectively), and dizziness (6.0%, 3.9%, and 0.8%, respectively). All adverse events were mild to moderate in severity, with none categorized as severe or requiring further intervention or monitoring. Few subjects discontinued the trials due to adverse events (SERENITY I: 0 for 180 mcg dose, 2 for 120 mcg dose and 0 for placebo arm; SERENITY II: 0, 1, and 0, respectively). We believe that the robust data set from our Phase 3 SERENITY trials will form a solid foundation for our work in our other BXCL501 trials.

In January 2020, we announced that the first patient was enrolled in the TRANQUILITY study, a Phase 1b/2 trial of BXCL501 for the acute treatment of agitation associated with geriatric dementia, expanding potential therapeutic use of BXCL501 beyond current neuropsychiatric disorders. We are currently in the process of assessing information for dose escalation from the TRANQUILITY trial and expect to report topline results in mid-2020. This study, an adaptive design, (30, 60, 90 mcg) includes agitated patients suffering from dementia greater than 65 years of age, who show clinically significant agitation. The endpoints in this study include assessing the patients Pittsburgh Agitation Scale (PAS), the PANNS Excitatory Component, and the Cohen-Mansfield Agitation Inventory (modified).

TRANQUILITY is an adaptive trial design to identify tolerable BXCL501 dose levels. The TRANQUILITY trial has successfully completed two dose cohorts, with 30mcg and 60mcg. We are initiating the 90mcg dose expansion cohort, and based on the findings, we expect to report topline results in the fourth quarter of 2020, or, if needed, proceed to an additional dose cohort.

On June 11, 2020, we announced that the first patient has been enrolled in the Phase 1b/2 RELEASE trial of BXCL501, for the treatment of opioid withdrawal symptoms with topline results expected in the first quarter of 2021. The RELEASE trial is a multicenter, randomized, double-blind, placebo-controlled, ascending-dose Phase 1b/2 study designed to evaluate the safety, pharmacokinetics, tolerability and efficacy of BXCL501 in patients experiencing symptoms of opioid withdrawal.

This study will enroll approximately 125 subjects with opioid use disorder who are physically dependent on opioids. During the 7-day treatment phase, BXCL501 will be evaluated in sequential, ascending dose cohorts of 30ug, 60ug,

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90ug, 120ug, and 180ug, administered twice daily (BID), approximately 12 hours apart. The study will assess opioid withdrawal symptoms using both the Clinical Opiate Withdrawal Scale (COWS) and Short Opiate Withdrawal Scale of Gossop (“SOWS-GOSSOP”) over a 10-day period. We expect to report topline results from the study in the first quarter of 2021.

On July 9, 2020 we announced that we had initiated an expanded access program at Massachusetts General Hospital (“MGH”) to provide BXCL501, to critically ill patients diagnosed with COVID-19 in the intensive care unit ("ICU") that may require calming or arousable sedation.

Facilitated by the U.S. Food and Drug Administration (“FDA”), expanded access, also known as compassionate use, provides an opportunity for patients to receive an investigational treatment prior to regulatory approval when there are no comparable or satisfactory therapeutic alternatives available.

We are continuing development plans for BXCL501 therapy for dementia chronic agitation and BXCL501 combination therapy for potential treatments of chronic agitation, as well as developing a single-use intramuscular injection for severe (non-cooperative) agitation patients. We expect to initiate a Phase 2 trial of BXCL501 in patients with agitation associated with delirium later this year. The planned study population will include ICU patients with or without COVID-19. This indication offers potential synergy with the commercial infrastructure being developed to support our first NDA.

Treatment of agitation remains a significant global healthcare challenge in patients with alcohol withdrawal and post-traumatic stress disorder, as the currently available treatment options are suboptimal, invasive, difficult to administer and often pose safety issues.

BXCL701 Immuno-Oncology Program

BXCL701 is a potential first-in-class, highly potent, oral small molecule immuno-modulator that is designed to stimulate both the innate and acquired immune systems by inhibiting dipeptidyl peptidase (“DPP 8/9”) and fibroblast activation protein. DPP 8/9 have been show to behave as a "checkpoint" of the innate immune system (Okondo et al., Nature Chem Biology, 2016), as their inhibition results in the induction of a potent pro-inflammatory form of cell death (pyroptosis) and the downstream stimulation of multiple tumor-killing immune cells, notably through the mediated induction of IL18. Based on our analysis, and supported by recent publications, we believe that BXCL701 may establish a differentiated immuno-oncology platform by modulating multiple steps in the cancer immunity cycle, and in combination with checkpoint inhibitors and/or immune activating agents, can convert immuno-resistant tumors to immuno-sensitive tumors ("cold” to “hot" tumors). Additionally, based on the unique mechanism of action (“MoA”) of the drug, we believe that BXCL701 may have the ability to augment response rates, in combination with checkpoint inhibitors, in classic hot tumors (e.g., melanoma), compared to checkpoint inhibitors alone; and reverse resistance to checkpoint inhibitors after progression. The development plan, detailed below, has therefore been designed to address both cold and hot tumor types.

The Company currently has three ongoing combination therapy clinical trials for BXCL701.

On April 28, 2020, we announced the initiation of the Phase 2 efficacy portion of the Phase 1b/2 trial of BXCL701 in combination with pembrolizumab (KEYTRUDA®) for treatment emergent Neuroendocrine Prostate Cancer (tNEPC). The Phase 1b safety assessment of BXCL701 indicated that a split dose totaling 0.6 mg per day is the recommended dose when used in combination with KEYTRUDA®, a PD-1 inhibitor. The 0.6 mg total daily dose has shown on-target side effects consistent with cytokine activation. Splitting the daily dose can be associated with an improved safety profile and will be used in the efficacy portion of the clinical program. In addition to the efficacy cohort in NEPC patients, on August 4, 2020, we opened a separate cohort for castration-resistant prostate cancer (“CRPC”) (adenocarcinoma) patients who have failed taxane-based chemotherapy and up to two lines of second generation androgen pathway blockers. This cohort is expected to run concurrently to the NEPC cohort. Preliminary cytokine data from this trial has shown dose- and time-dependent changes in circulating IL-18 concentration, consistent with our understanding of the MoA of BXCL701 from preclinical experiments. Initial efficacy data from this trial is expected to be presented later this year.

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We recently advanced the clinical evaluation of BXCL701 into multiple advanced solid tumors where checkpoint inhibitors are indicated (“hot tumors”). The MD Anderson-led Phase 2 open-label study is a basket trial designed to evaluate the response rate of orally administered BXCL701, combined with KEYTRUDA® in patients with advanced solid cancers. The study consists of two arms: arm A is testing the combination of KEYTRUDA and BXCL701 in checkpoint naïve patients (where checkpoint therapy is indicated); and arm B is testing the same combination in patients who have progressed following checkpoint therapy alone. MD Anderson initiated this trial on March 19, 2020, and the safety portion of the trial was completed in June 2020. As of August 2020, the efficacy bar had been met for both arms of the trial, and the study will proceed to completion of stage 2 efficacy. Preliminary data are expected to be presented at a scientific conference later this year.

The BXCL701 phase of the triple combination study of BXCL701, bempegaldesleukin (NKTR-214, Nektar Therapeutics, Inc.) and BAVENCIO® (avelumab, Merck KGaA, Darmstadt, Germany and Pfizer) in second line pancreatic cancer is expected to be initiated following Nektar and Pfizer’s Phase 1B safety trial of a double combination of bempegaldesleukin and avelumab, pending the outcome of that trial. An important feature of this trial is the requirement for paired tissue biopsies, which is intended to further elucidate the drugs’ MoA.

Finally, we continue to enroll patients in the clinical proof of MoA of BXCL701 in pancreatic cancer to further validate BXCL701’s MoA. Initial data is expected by year-end.

In order to further explore compelling combinations with BXCL701 where there remains an unmet clinical need, we are in the early planning phase of two additional trials: one in combination with standard of care therapy in relapsed/refractory Acute Myeloid Leukemia (“AML”); and a trial testing the combination of cellular therapy and BXCL701 in solid tumors, in order to address the immune-suppressive microenvironment.

Basis of Presentation

The Company’s financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”). All amounts are presented in thousands.

Components of Our Results of Operations

Revenues

We have not recognized any revenue since inception.

Operating Costs and Expenses

Research and Development

Research and development expenses consist primarily of costs incurred for the research and development of our clinical and pre-clinical product candidates, which includes payments to BioXcel, our Parent.

•employee-related expenses, including salaries, benefits and stock-based compensation expense and travel expenses for employees engaged in research and development functions;

•expenses incurred under agreements with contract research organizations, or CROs, and sites that conduct our non-clinical studies and clinical trials;

•costs of outside consultants engaged in research and development activities, including their fees, stock-based compensation and travel expenses;

•the cost of acquiring, developing and manufacturing pre-clinical and clinical trial materials and lab supplies; and

•depreciation and other expenses.

We expense research and development costs to operations as incurred.

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Our research and development costs by program for the six months ended June 30, 2020 and 2019 were as follows:

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General and Administrative

General and administrative expenses consist primarily of personnel costs, including salaries, benefits, stock-based compensation and travel expenses for our executive, finance, corporate development and other administrative functions. General and administrative expenses also include legal expenses to pursue patent protection of our intellectual property, professional fees for audit and tax and insurance charges.

We expect that our general and administrative expenses will increase as we expand our clinical programs. We also expect increased administrative costs resulting from our clinical trials and the potential commercialization of our product candidates. We believe that these increases will likely include increased costs for director and officer liability insurance, hiring additional personnel to support future market research and future product commercialization efforts and increased fees for outside consultants, attorneys and accountants. We may also incur increased costs to comply with corporate governance, internal controls, investor relations and disclosures and similar requirements applicable to public companies.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is set forth in Note 3 to the financial statements included in this Quarterly Report on Form 10-Q.

Summary of Results of Operations

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Comparison of the Three Months Ended June 30, 2020 and 2019

Revenues

We have not recognized any revenues since inception.

Research and Development Expense

Research and development expenses for the three months ended June 30, 2020 were $17,906, compared to $6,506 for the three months ended June 30, 2019. The increase of $11,400 is attributable to changes in the costs described in the table below:

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Salaries, bonus & related costs increased due to increases in headcount and related benefits, payroll taxes and recruiting fees offset in part by reduced travel costs as a result of COVID-19 travel restrictions.

Non-cash stock-based compensation increased due to an increase in the number of equity-based awards granted and increased grant date fair values arising from higher market prices of the Company’s stock.

The increase in professional research & project related costs, clinical trials expense and CMC costs reflect the acceleration of research and development activities primarily related to our SERENITY I and II clinical trials for BXCL501.

All other expenses increased as a result of higher shared service charges and technology subscription costs.

General and Administrative Expense

General and administrative expenses for the three months ended June 30, 2020 were $3,529 compared to $2,129 for the three months ended June 30, 2019. The increase of $1,400 is attributable to changes in the costs described in the table below:

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Salaries, bonus & related costs increased due to increases in headcount and related benefits, payroll taxes and recruiting fees offset in part by reduced travel costs as a result of COVID-19 travel restrictions.

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Non-cash stock-based compensation increased primarily due to an increase in the number of shares granted, in particular due to additional grants provided to officers and directors of the Company and increased headcount. In addition, the rise in the Company’s stock price also created higher non-cash stock-based compensation costs.

Professional fees increased due to expanding operations and operating as a public company. Higher patent, legal, investor relations and information technology costs were incurred during the three months ended June 30, 2020 than the three months ended June 30, 2019.

Insurance costs increased due to an increase in Director and Officer liability insurance.

All other costs approximated the prior year period.

Comparison of the Six Months Ended June 30, 2020 and 2019

Revenues

We have not recognized any revenues since inception.

Research and Development Expense

Research and development expenses for the six months ended June 30, 2020 were $30,277 compared to $12,180 for the six months ended June 30, 2019. The increase of $18,097 is attributable to changes in the costs described in the table below:

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Salaries, bonus & related costs increased due to increases in headcount and related benefits, payroll taxes and recruiting fees offset in part by reduced travel costs as a result of COVID-19 travel restrictions.

Non-cash stock-based compensation increased due to an increase in the number of shares granted and a higher fair value in grant prices arising from higher market prices of the Company’s stock.

The increase in professional research & project related costs, clinical trials expense and CMC costs reflect the acceleration of research and development activities primarily related to our SERENITY I and II clinical trials of BXCL501.

Drug acquisition costs in 2019 were related to certain payments triggered pursuant to our asset contribution agreement with our Parent as discussed in Note 4 to the financial statements included elsewhere in this Quarterly Report on Form 10-Q.

All other expenses increased as a result of higher occupancy costs, product liability insurance and shared service charges.

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General and Administrative Expense

General and administrative expenses for the six months ended June 30, 2020 were $6,154 compared to $3,874 for the six months ended June 30, 2019. The increase of $2,280 is attributable to changes in the costs described in the table below:

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Salaries, bonus & related costs increased due to increases in headcount and related benefits, payroll taxes and recruiting fees offset in part by reduced travel costs as a result of COVID-19 travel restrictions.

Non-cash stock-based compensation increased primarily due to an increase in the number of equity-based awards granted, in particular due to additional grants provided to officers and directors of the Company and increased headcount. In addition, the rise in the Company’s stock price also created higher non-cash stock-based compensation costs.

Professional fees increased due to expanding operations and operating as a public company. Higher patent, legal, investor relations, licensing and information technology costs were incurred during the three months ended June 30, 2020 than the three months ended June 31, 2019.

Insurance costs increased due to an increase in Director and Officer liability insurance.

All other costs decreased due to reduced attendance at conferences and trade shows as a result of COVID-19 travel restrictions and lower furniture rental charges.

Inflation

Inflation generally affects us by increasing our cost of labor and clinical trial costs. We do not believe that inflation has had a material effect on our results of operations during the periods presented.

Liquidity and Capital Resources

As of June 30, 2020, we had cash and cash equivalents of $65,495, working capital of $52,152 and stockholders’ equity of $53,394. Net cash used in operating activities was $26,977 and $11,697 for the six months ended June 30, 2020 and 2019. We incurred losses of approximately $36,330 and $15,675 for the six months ended June 30, 2020 and 2019. We have not yet generated any revenues and we have not yet achieved profitability. We expect that our research and development and general and administrative expenses will continue to increase and, as a result, we will need to generate significant product revenues to achieve profitability. We believe that our existing cash and cash equivalents as of June 30, 2020, the cash generated from the July 2020 offering of our common stock described below and a review of projected project timing, will enable us to fund our operating expenses and capital expenditure requirements well into 2022.

Management intends to obtain financing through sales of the Company’s equity securities, entering into strategic partnership arrangements and/or short-term borrowings from banks, stockholders or other related parties, if needed. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing

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uncertainty related to the COVID-19 pandemic. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the pandemic continues to evolve globally. See “Impact of COVID-19 Pandemic” above and “Risk Factors—The outbreak of COVID-19, or other pandemic, epidemic or outbreak of an infectious disease may materially and adversely impact our business, including our preclinical studies and clinical trials.” in Part II, Item 1A. of this Quarterly Report on Form 10-Q for a further discussion of the potential impact of the COVID-19 pandemic on our business.

Sources of Liquidity

We have focused our efforts on raising capital and building the products in our pipeline. Since our inception, all of our operations have been financed by our Parent, BioXcel, from the sales of our common stock in private placements and public offerings and under an Open Market Sale Agreement. We have not yet established an ongoing source of revenue sufficient to cover our operating costs and will need to do so in future periods.

In May 2019, we entered into an Open Market Sale Agreement, or the Sale Agreement, with Jefferies LLC, or Jefferies, pursuant to which we could offer and sell shares of our common stock having an initial offering price no greater than $20,000, from time to time, through an “at the market offering” program under which Jefferies would act as sales agent. From May 2019 to September 2019, we sold a total of 66,193 shares for gross proceeds of $737 and net proceeds of $387. We terminated the Sale Agreement on September 22, 2019.

In September 2019, we sold in a registered offering 2,303,030 shares of our common stock at a public offering price of $8.25 per share, less underwriting discounts and commissions for which we received gross and net proceeds of approximately $19,000 and $17,423, respectively.

In February 2020, we sold in a registered offering 2,300,000 shares of our common stock at a public offering price of $32.00 per share for gross proceeds of $73,600 less underwriting discounts and commissions. The Company received proceeds of approximately $68,811, net of issuance costs of $4,789 from the February 2020 offering. The Company used $9,024 of the proceeds to purchase and cancel 300,000 shares of common stock from BioXcel.

We received funds under the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in April 2020 in the amount of $537. On April 23, 2020 the Small Business Administration issued a new FAQ #31, which provided guidance on what it means to certify that: “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Following review of this new FAQ #31 we decided to withdraw from the Paycheck Protection Program and have repaid the loan in full together with all accrued interest.

In July 2020, we sold in a registered offering 4,000,000 shares of our common stock at a public offering price of $50.00 per share for gross proceeds of $200,000 less underwriting discounts and commissions. The Company received proceeds of approximately $187,500, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Under the terms of the Underwriting Agreement that we entered into in connection with the July 2020 offering, certain of our stockholders have also granted the underwriters an option exercisable for thirty days to purchase up to an additional 600,000 shares of common stock at the public offering price less underwriting discounts and commissions. The Company will not receive any of the proceeds from any sale of shares in the offering by such stockholders.

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Cash Flows

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Operating Activities

For the six months ended June 30, 2020, net cash used in operating activities was $26,977 which consisted of a net loss of $36,330 partially offset by $2,732 in stock-based compensation and $95 of depreciation and amortization. Increases in accounts payable, accrued expenses and other of $7,663 were offset in part by increases in prepaid expenses (primarily for insurance premiums) and other assets of $1,137.

For the six months ended June 30, 2019, net cash used in operating activities was $11,697 which consisted of a net loss of $15,675 partially offset by $1,712 in stock-based compensation and $122 of depreciation and amortization. Increases in accounts payable and accrued expenses of $3,153 were offset in part by increases in prepaid expenses (primarily for insurance premiums) and other assets of $1,009.

Investing Activities

Net cash used in investing activities was $51 for the six months ended June 30, 2020, compared to $825 for the six months ended June 30, 2019. All of the net cash used in investing activities for six months ended June 30, 2020 related to expenditures for property and equipment. The majority of our expenditures for the six months ended June 30, 2019 were related to construction costs and purchases of furniture for the occupancy of our office site.

Financing Activities

Net cash provided by financing activities was $60,097 for the six months ended June 30, 2020. Our February 2020 Offering provided funds of $68,811, net of $4,579 of closing costs. Approximately $9,024 from this offering was used for the purchase and cancellation of 300,000 shares owned by BioXcel. Exercises of options provided funds of $310.

Net cash used by financing activities was nominal for the six months ended June 30, 2019.

Operating Capital and Capital Expenditure Requirements

We expect to continue to incur significant and increasing operating losses at least for the next several years as we expand our clinical trials of BXCL501 and BXCL701, seek marketing approval for our product candidates and pursue development of our other product candidates. We do not expect to generate revenue unless and until we successfully complete development and obtain regulatory approval for our product candidates. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our planned clinical trials and our expenditures on other research and development activities.

We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all of our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our operating capital requirements. We anticipate that our expenses will increase substantially as we: